FTT+ April 7th: Sofi Acquires Galileo for $1.2 Billion
Hey everyone, Ian and Julie here.
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Well the news is official: SoFi is buying Galileo Financial Technologies for a sum of $1.2B. For more details on the deal, CNBC’s Kate Rooney has a great overview.
It’s an interesting deal, one that we’re still making sense of (as are many of us). SoFi doesn’t have a product in the infrastructure space, and acquiring Galileo means acquiring some of the biggest neobank products in the U.S. Galileo powers the debit card for companies like Chime, Robinhood, Current, Monzo, Transferwise, and a plethora of other consumer companies. Maybe it’s a sort of Greendot play? Though, I’m not sure SoFi really wants that comp given that Greendot’s stock has gone from nearly $100 in 2018 to $25 today.
Galileo has also been working on an Instant Issuing product with a number of early stage fintech consumer companies too. The product itself is pretty unique—a company can get onboarded and start issuing cards within an hour, sometimes even less.
For the past week or so, rumors were circulating that Galileo was getting acquired. One of the names that popped up was Chime. To Ian and me, that was a bit peculiar; Chime is a consumer company that hasn’t had previously reported interest in becoming a banking-as-as-service platform. Nor does it make much sense that Chime can succeed in that arena; Galileo powers a ton of Chime competitors and building a platform implies that your parent company won’t be competing with your potential customers.
But the same concerns apply to SoFi too. Will big customers like Chime and Current feel comfortable that their customer data, engagement and usage data around debit cards...what’s arguably the most unique dataset in consumer fintech today, is now wholly owned by SoFi, a consumer fintech company. It’s like if Snapchat was on AWS, and AWS was sold to Facebook; it’s natural to think that Snapchat would move to another cloud service provider.
It’s a tough catch 22 for these consumer fintech companies on Galileo; moving technical stacks in fintech is not easy at all. But there are options out there. Do you bite the bullet and move to a different infrastructure partner, or stay on Galileo and run the risk of Galileo’s parent company SoFi getting unparalleled visibility into your business? Part of this might also depend on some of the terms of the relationships, in the case that maybe Galileo would be on the hook for switching costs in the event of M&A.
Now, maybe we’re overly cautious. And maybe Galileo and their clients have confidentiality agreements in place, so that in case an acquisition got bought, data wouldn’t be completely visible by the parent company. But still...it doesn’t really sit well with us if our vendor is owned by a competitor. In our minds, it would have made more sense for someone like Stripe or its competitor, Marqueta, to snap it up.
We dug around this and have heard a lot of different theories around why Galileo sold now, and why SoFi finds the company attractive. Word on the street is that after Chime’s massive outage at the end of last year, Galileo’s business took a hit. It’s hard to tell how though; it doesn’t seem like customers were leaving, but might be that rates were re-negotiated that cut into Galileo’s margin. And it's hard to believe that it was getting a bunch of new customers to sign up after seeing what happened with Chime late last year.
For SoFi, this could be an avenue to eventually getting a bank charter. It’s a playbook that exists already; banking-as-a-service providers like Radius Bank have a charter and deep financial experience, and they got snapped up by Lending Club. As a company whose primary product is lending, a bank charter is imperative to SoFi’s future—the cost of capital drops dramatically and lending products become more more profitable. If SoFi sees Galileo as a way to get a charter down the line, the cost of this deal will seem marginal in hindsight.
This also ties into another theory we’ve heard: that SoFi, given their expertise in the lending market, can use Galileo as a channel partners to upsell existing Galileo customers like Chime into white-label lending products, like student loans refinancing, credit cards, and mortgages. But in any of these scenarios, it’s hard to really see what the SoFi customer gets out of this.
SoFi in the meantime gets what at least was at one point a profitable, growing, infrastructure company with a lot of ambition. We reported that Galileo recently opened a new office in Mexico City and has been focusing a lot on expanding to the Latin American market. We’d be interested in seeing how the deal is structured as well, since SoFi has a number of unprofitable businesses that are eating into it’s revenue from its lending product (which has been seeing revenue drop in recent years). Matt Harris had a great tweet on this.
For Galileo, this sounds like a great exit for CEO Clay Wilkes and Accel. We don't believe we've ever seen a valuation published for Galileo before, so it's hard to tell if this is above or below what it has previously traded at. Mercato Partners, Kickstart Seed Fund, Kensington Capital, Trident Growth Fund, and Vencore Capital also invested in 2014, which was unreported previously but confirmed by data compiled by Pitchbook.